IR35 is one of those tax rules that’s simultaneously well-known and poorly understood. Most people with any involvement in UK contracting have heard of it. Far fewer can accurately describe how it works, what it determines, or what getting it wrong costs.
The connection between IR35 and employer of record services is a genuine source of confusion — partly because EOR is sometimes marketed as an “IR35 solution,” and partly because the two concepts exist to address related but distinct problems. This article explains both, where they actually overlap, and what an EOR can and can’t do for contractor compliance.
Recommended Employer of Record
What is IR35?
IR35 is shorthand for the off-payroll working rules — tax legislation designed to prevent avoidance by workers who provide services through an intermediary (usually their own personal service company, or PSC) but whose actual working arrangement looks more like employment than self-employment.
The underlying logic: if someone leaves a company on a Friday and returns on Monday doing the same job, for the same manager, on the same terms, but now invoicing through a limited company — they’re a disguised employee. They’re using the tax advantages of self-employment (dividends rather than salary, reduced NI exposure) without any of the genuine characteristics of running an independent business. IR35 is how HMRC can look past the structure to the substance and tax it accordingly.
How the status test works
IR35 status is assessed against three primary factors:
Control. Does the client control what work is done, when, where, and how? High levels of client control point toward employment.
Substitution. Can the contractor genuinely send someone else to do the work if they’re unavailable? A real right of substitution — not just a clause in a contract that nobody intends to use — points toward self-employment.
Mutuality of obligation. Is the client obliged to offer work, and is the contractor obliged to accept it? An ongoing mutual obligation points toward employment.
Secondary factors include how integrated the contractor is into the client’s business, who provides equipment, whether the contractor bears real financial risk, and the overall commercial reality of the relationship. None of these factors is individually conclusive. The test is applied to the whole picture.
Who determines status — and when that changed
Before April 2021, contractors working through their own PSCs in the private sector determined their own IR35 status. From April 2021, that changed for medium and large businesses.
The current position:
Small businesses (below two of three thresholds: 50 employees, £10.2m turnover, £5.1m balance sheet) are not responsible for the IR35 determination. The contractor determines their own status.
Medium and large businesses must determine IR35 status for any contractor working through a PSC, issue a Status Determination Statement (SDS) informing the contractor of the result, and if the contractor is determined to be inside IR35, deduct income tax and NI through PAYE.
Public sector bodies follow the same rules as medium and large private-sector businesses regardless of size.
Where EOR fits in
An EOR isn’t an IR35 solution in the strict technical sense, because IR35 applies to contractors working through intermediaries, and an EOR converts workers to employment. There’s no intermediary involved. But the two things intersect in practice in a few important ways.
EOR as IR35 mitigation. If you determine that a contractor is inside IR35 — the working relationship looks like employment — you have choices about how to formalise it. One option is your own payroll. Another is to engage them through an EOR, which employs them properly under UK law and handles PAYE from day one. There’s no IR35 risk in an EOR arrangement because the worker is genuinely employed, not working through an intermediary.
EOR for contractors who want to convert. Some contractors, told they’re inside IR35, prefer to convert to employment rather than try to restructure the engagement to pass the test. An EOR provides a clean employment structure that is unambiguously outside IR35 — because there’s no PSC involved. The contractor becomes an employee.
EOR for businesses that want certainty. A medium or large business with concerns about a contractor’s IR35 status, and no appetite for managing a PAYE deduction process for contractors alongside maintaining those relationships, may find that converting the contractor to EOR employment is cleaner. It removes the IR35 determination requirement because there’s no longer a PSC in the picture.
What EOR doesn’t solve
An EOR doesn’t fix a historical IR35 problem retroactively. If a contractor has been operating through a PSC inside IR35 without the correct tax treatment, converting them to EOR employment now doesn’t resolve the back-tax exposure. HMRC can still investigate past arrangements and assess taxes for periods when the wrong status determination was applied.
An EOR also doesn’t help if you’re trying to keep a genuinely employment-like relationship structured as self-employment. The EOR itself would conclude that the working relationship is employment — because it is — and employ the person accordingly. The underlying status issue is the same either way; the EOR just gives you a compliant structure for it.
The CEST tool
HMRC provides a Check Employment Status for Tax (CEST) tool that medium and large businesses can use to help determine IR35 status. HMRC has committed to stand behind CEST results in most circumstances, which provides some protection if a determination is later challenged.
CEST gets criticised for producing uncertain results in cases involving substitution and mutuality of obligation — which, awkwardly, are the two most legally contested factors. For straightforward engagements it’s a reasonable starting point. For complex cases — long-running contractor relationships, ones where the right of substitution is unclear, or where the work is deeply integrated into your operations — take professional advice rather than relying on the tool alone.
The practical approach
For small businesses (below the thresholds that trigger the off-payroll rules), the IR35 determination rests with the contractor. Your obligation as a small business client is to be honest about the working relationship if asked. You can’t instruct a contractor to declare themselves outside IR35 if the facts clearly suggest otherwise.
For businesses approaching the medium-company threshold, it’s worth reviewing your contractor arrangements before you cross it. Once you become a medium or large business, you’re responsible for IR35 determinations across all your contractor relationships — and getting that process wrong is expensive and administratively demanding.
For businesses that want to avoid the IR35 complexity entirely and are working with people who should realistically be employees anyway, an EOR is a clean route. You skip the status determination process, skip the PSC relationship, and have a straightforward compliant employment arrangement that HMRC cannot challenge on IR35 grounds — because there’s no intermediary involved.
Read our introductory guide to EOR services and our shortlist of the ten best EORs for UK businesses covers providers in more detail.
